The Psychology of Pricing in a Pandemic
Consumer spending behavior has greatly shifted since COVID-19. I am reminded of this as I work from home and look outside at a rather luxurious garden shed I built some time ago. Additional units on a property – an extra office space, workout areas, craft room – you name it – have been in high demand as people find themselves spending so much time at home. This virus has taught us a lot about how we behave and spend our money now, compared to just a few months ago.
In the current market conditions, demand is volatile, and we’re witnessing a slew of pricing challenges. Consumers have completely changed the way they think, process and ultimately decide on purchases.
In a world of rapidly changing purchasing behavior, businesses should consider:
Finding the home advantage. With more time spent at home, consumers have started to enjoy cooking and taken on other DIY projects like growing their own herbs and baking bread. Less money spent in restaurants means more money available for purchasing products like high-end appliances and gardening equipment. It only makes sense to identify the products in your portfolio that will benefit from the shift to at-home consumption.
Focusing on premier offerings and not being quick to slash prices. Be careful not to dilute the brand by lowering prices on every offering or particle. As a former pricing executive in the wine and spirits industry, I naturally still follow industry trends. German wine merchants have seen their premium sales boom: unable to purchase comparatively expensive bottles of wine in restaurants, consumers are ordering higher quantities of slightly less expensive wines (without restaurant mark-ups) and enjoying them at home. One large, German wine retailer’s sales have doubled during the COVID 19 crisis. In this context, it makes little sense to lower prices on premium wines, when consumers are looking precisely for slightly upscale wines.
Producers must carefully consider whether lowering prices to chase short-term volume will erode brand health and allow other brands to emerge from the crisis with a more desirable image. Here again, pricing decisions need to be made in the context of the entire portfolio that a producer has at its disposal, but it will be critical to post-coronavirus success to maintain prices on the premium products.
Reevaluating the high end. During this time, allocating money on awareness and advertising on high-end products could be extremely important. Once consumers have more disposable income (hopefully when this is “all over”), on what will they spend their money? It is imperative to maintain brand image, and a big part of perception is price. A good example is Nike, who maintained their high shoe prices during the 1980s recession. Nike built an aspirational brand by resisting the temptation to follow the market leaders in lowering prices. The result? By the time the U.S. emerged from that recession, Nike and its $100 sneakers had become the brand to have, and Nike left the competition behind.
Seeing local as an advantage. Domestically and/or locally made goods have been of increased interest to consumers in recent years, and now we have more time to research products that support domestic production. This is affecting the demand for foreign-sourced goods like groceries, clothing, and more. Recent research says that since the pandemic began, one-third of consumers would pay more for domestically produced products. Before COVID-19, many consumers tended to shop the easiest path to purchase or the least expensive shops, but this new world has shifted our relationship with local brands, perhaps giving us a sense of responsibility to help a community business survive during trying times. Retailers – even discounters – advertise local or regional products as a differentiator, even though these products are more expensive than imports. Under these circumstances, highlighting the “made locally” aspect of products can be beneficial and profitable. If the materials are sourced from a particular region or if the parts are assembled in that region, highlight that in advertising and in the selling pitch. This has less to do with patriotism than it does with shorter distances between raw materials and product finishing. If that benefit can be monetized, you should do it.
Reclaiming environmentally conscious brands in their portfolios. A recent study found that since the start of the COVID-19 pandemic, more than two-thirds of Americans have realized they needed and wanted to be more environmentally friendly. And when I made the point earlier about thinking about brand longevity, this recommendation applies here, too. The same survey found that 81% plan to keep their eco-friendly habits up even after the pandemic ends. Consumers in the U.S. and around the world showed a shift in supporting environmentally friendly goods even before the coronavirus started, but now the interest has heightened. With so many shoppers willing to pay more for sustainable products and packaging, highlighting these attributes offer yet another way to maintain or even increase prices on select products. Shifting to green or reduced CO2 production and making it known has been happening for quite some time, but the trend is accelerating. Manufacturers are making the switch to biodegradable packaging and making it known. When consumers see green attributes on the packaging, it is a tangible benefit that smart manufacturers will use to push or at minimum maintain pricing.
With more time at home, consumers are spending their time researching these goods, where they’re from, where they’re being manufactured, in what conditions, and more. Now, they are reallocating their funds to support these businesses. On September 1, one German discounter launched an experimental format that shows shoppers the “true cost” of eight of their own-label products, taking into consideration the environmental impacts of production methods and the supply chain. This allows shoppers to weigh the consequences of their choice of green versus conventional products, and perhaps to spend just a little more on green products. It may be a long shot, but it may well be that tapping into the consumer’s conscience is another way to maintain pricing.
We have reviewed several examples of how it is possible to maintain prices in the current environment with an eye on future shifts in purchasing habits. It is fair to say that suppliers need to recognize that the post-COVID 19 world will be different, but it will not be a catastrophe. We need to be level-headed, and not lower pricing across the board because of bleak economic forecasts. Suppliers need to prepare for the most probable scenarios – which are not all “worst case” – and identify the many opportunities to maintain or even increase prices as consumer habits shift.
John Kuffel is a solution strategy consultant for Pricefx. He was previously European pricing director for Bacardi.
